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New caution on role of expert networks
December 10, 2010 / 3:41 AM / 7 years ago

New caution on role of expert networks

<p>Martin Sass, founder, chairman and CEO of M.D. Sass, speaks at the Reuters Investment Outlook Summit in New York December 7, 2010. REUTERS/Brendan McDermid</p>

NEW YORK (Reuters) - Money manager Martin Sass’ team of analysts has long used so-called expert network firms to gain investing insight, but now that the U.S. government is probing how consultants interact with stock pickers, he is taking new precautions.

Sass, who runs New York-based investment firm M.D. Sass, had his own compliance team review policies surrounding expert networks.

He will also have the head of expert network firm Gerson Lehrman Group’s legal department speak with his analysts to provide some extra training on exactly what information consultants can offer legally.

“As stock pickers we have a job of doing intensive research but not crossing the line,” Sass said at the Reuters 2011 Investment Outlook Summit in New York this week.

Now that the government’s probe into possible insider trading on Wall Street is picking up steam, expert network companies, including GLG and competitors like Coleman Research and GuidePoint Global, appear to be squarely on the government’s radar screen.

Last week, federal officials sent another round of subpoenas to hedge funds and other investment firms, Reuters reported this week.

For hedge fund and mutual fund managers who use the networks, which offer a way to get an edge on their competition, the probe could have big consequences for the way they work, investors and analysts agreed at the summit.

“This is going to be, and should be, a wake-up call that people are watching,” said Shawn Kravetz, president of hedge fund firm Esplanade Capital. “Insider trading is illegal, and wherever you get the information from and however it comes to you, it had better be legal,” he said.

Already, many hedge funds and mutual funds are redoubling their efforts to make sure they don’t inadvertently get nonpublic information. Some investment firms make a point not do business with consultants who only recently left companies whose securities are held in the investment firm’s portfolios.

Other fund managers said the probe could force investors to do more of their research in-house.

“If people are willing to read the annual reports and look at the footnotes, they might not need consultants as much,” said Charles de Vaulx, portfolio manager at mutual fund firm International Value Advisers.

Years ago, when de Vaulx was first approached by expert network firms, he recalled being worried.

“We are a bunch of nervous Nellies, and something in my little mind just said this wasn’t right,” de Vaulx said, adding, “what they offer is more relevant for short term investors. We don’t need it.”

At the same time some investors worried that the probe could have an unduly chilling effect on small hedge funds and even potentially the consultants who work with them.

“It would be a shame if people closed down because of the fear of a witch hunt,” Sass said.

Investors and consultants also worry that average Americans who put their money into the markets will feel they are disadvantaged compared with larger investors who have access to pricey research tools.

“I will feel good about the regulatory environment when you have a raid the way we did on those hedge fund firms two weeks ago, and the markets move up instead of down,” said Gail Fosler, former Conference Board economist who now runs a strategic advisory service.

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